Enter the 800-Pound Market Gorilla

Posted by Matt Blackman - Macro Market Monitor via Don Vialoux

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Quote of the Month:

“The U.S. turned 234 years old…, and yet over half of the nation’s money supply was created since Helicopter Ben took over the flight controls four years ago.  No wonder gold is in a full fledged bull market.  The annual output of gold has declined 12% in the past decade while the marginal cost has more than doubled, to $500, according to David Hale.  Moreover, David points out in his recent report that since 1900, more than 80% of the world’s proven reserves have ready been mined.  The marginal cost of pressing on Dr. Bernanke’s printing machine is basically zero, and, the prospects of a re-expansion of QE by the Fed as double-dip risks rise with each and every passing data-point are rather high.  Gold has corrected to the 50-day moving average in recent weeks, which in the past has been a terrific entry point — for the past six months, each low has been higher and each high has been higher too.  Nice upward channel that is to be respected and to be bought.” – David Rosenberg – First paragraph July 5, 2010 ‘Breakfast with Dave’ letter. 

Now that the first half of 2010 is over, we thought a macro market view was in order. Dave Rosenberg provided the best overview we’ve seen recently making a strong case for gold in the opening paragraph of Breakfast with Dave the day following July 4 celebrations. Yes, it will encounter corrections but it is difficult to imagine, given the current fiscal challenges together with the tools available to bureaucrats like Ben Bernanke to pump out fiat paper money (and credit) at next to zero cost, that any drop in the price of the yellow metal will be anything other than fleeting. 

So how are gold and other important commodities performing relative to stock markets around the world? What factors are driving markets and of greater interest to traders and active investors, what trends can we expect from here?

Enter 800-Pound Market Gorilla Number 1

In the next two charts, chart 1 showing international stock indexes and chart 2 showing some key commodity prices, we compare performances since April 2008. The CRB Index, which measures the composite price of a basket of 17 commodities (lime green), has been added to both charts.

The three vertical lines from left to right show 1) the bottom of the Chinese Shanghai Shenzen Composite Index (SSE) October 31, 2008 (left red-dashed line), 2) the bottom of the S&P500 Index March 6, 2009 (blue-dashed line) and 3) the most recent top of the Shanghai Composite July 31, 2009 (right red-dashed line). Note from chart 2 that the industrial commodities like silver, copper and crude oil bottomed around or just after the SSE.  So did gold.

What stands out is that after the peak in the Shanghai Composite, commodities continued to rally until the peak in copper in the second week in April 2010. Oil peaked two weeks later. However, both silver and gold continued to move higher.

….read more (start at the first charts) of Enter the 800-Pound Market Gorilla